Question: Economists have long believed that the more money printed, the higher will be long-term interest rates. Evidence for this view can be found in the table below, which gives long-term government bond rates for 31 countries and the corresponding growth rate of money supply for each country.10
• Plot the data and use a regression to find the relation between the money growth and the long-term bond interest rate.
• If a country has zero money growth, what is its predicted long-term bond interest rate?
• The monetary authorities in your country are considering increasing the money growth rate by 1% from its current level. Predict by how much will this increase the long-term bond interest rate.
• Do you find the evidence in the table convincing? (Discuss briefly the R2 of the regression.)
